Archives for July 2008

Biotech is a hot sector right now and should quickly become a new focus for trend followers. My favorite way to track the trend in biotech is with the sector ETF: iShares NASDAQ Biotechnology Index (IBB). Through yesterday this fund is up 7%, outperforming the S&P 500 by 20%. For the trailing 12 months the fund has beat the S&P 500 by 24% with a return of 13%.

Let’s take a look at some charts. First, we will review the weekly price and volume action for one year:

I like to look at weekly charts when trying to identify long-term trends because they filter out alot of the noise we pick up with daily price action. Here are my observations on the above chart:

IBB is currently trading around 86 which is up almost 25% from the March low of 69.43.

The 52-week high for IBB is 89. This peak came along with the broad market making new highs last October.

After the March low, IBB began building a nice base to setup a rising trend that began in early July.

Notice the following key events in the price action at the beginning of July: 1.) The price broke out above both the 10-week and the 40-week moving average. 2.) The shorter term moving average (the 10-week) crossed over the longer-term moving average (the 40-week). 3.) The slope of the moving average turned up. 3.) The weekly prices have been positive on increasing volume.

The daily chart below confirms the bullish trend in IBB:

As the charts indicate, there is clearly a bull market in biotech. Trend followers may want to consider entering a position on a pullback in price. The price is extended well above the moving averages and a pullback is likely. However, it should be noted that biotech is a very volatile sector and any new positions taken in IBB should be done with caution. See the chart at the end of this post to get a clear picture of the volatility in this sector.

The key is to have a plan. Have clear rules that dictate when to get in and out of your positions. Don’t buy IBB based on this post alone. I’ve given you an investment idea to consdier, but ultimately you must do your homework and follow your purchase rules. Don’t have the time or desire to do your own research? That’s fine. My firm can do it for you. Contact us to see how we might be able to help you.

With the price of oil surging (see previous post) and some arguing that we have hit peak supplies of oil it is time to develop alternative energy sources.

In 1970, we (United States) imported 24% of our oil. Today, it’s nearly 70% and rising. As oil prices rise, we are sending massive amounts of wealth out of our country. The US represents just 4% of the world’s population, but we use 25% of the world’s oil demand. According to T. Boone Pickens, America is addicted to foreign oil and it’s time to look at other sources of energy. Mr. Pickens predicts that oil prices will hit $300 a barrel in 10 years if the United States fails to reduce its dependence on foreign imports.

Mr. Pickens has a plan. The plan promotes alternatives to oil, including natural gas, wind, and solar. A major feature of the plan is replacing the electricity that the United States gets from natural gas with WIND energy. This would then allow that natural gas to provide 38% of the States’ fuel for transportation and reduce its dependence on foreign oil.

The Pickens Plan calls for the United States to leverage its wind corridor in the middle of the country which stretches from Texas through the great plains to the Canadian border. The Great Plains states are home to great wind energy potential. The Department of Energy reports that 20% of America’s electricity can come from wind.

Two new ETFs were recently launched that will give investors an opportunity to invest in companies that specialize in wind:

These ETFs are so new it’s too early to identify a solid trend. However, I believe that with high oil prices and a push towards to clean energy there is potential that WIND will soon be a trend. Add these funds to your watch list and see what happens as the Pickens Plan gains momentum.

The trend in financials has clearly been down for the past 12 months. You may be wondering if financials have finally hit bottom after seeing positive reports from Wells Fargo and JP Morgan lift financial shares this week. If we believe Bridgewater Associates, then the short answer is probably not yet.John Mauldin‘s most recent letter reported that Bridgewater warns that bank losses from the worldwide credit crisis may reach $1.6 trillion. This is four times official estimates and means that at least another $1.1 trillion of losses that will have to be written off by financial institutions all over the world.

For trend followers it’s too early to tell if we’ve hit bottom. Trend followers don’t predict or time the changes in the market. Trend followers specialize in IDENTIFYINGthe trend and investing with it. So, let’s take a look at a few charts to see what we can find.

First, we have a 3-year weekly chart of XLF, the Finacial Sector ETF:

Notice that we have had a declining trend since last July when the price dropped through the 40-week moving average. This was a definite red flag and a signal of danger ahead.

Conclusion: Don’t try to predict the bottom or time the turn in financials. Somewhere ahead lies a great opportunity to invest in financials. But, trend followers should be patient. Remember that trends often last longer than you think. Many thought the worst was over for financials after the Bear Stearns bailout in May. As Bridgewater reports, it could get worse before it gets better. Wait until a bottom can be identified along with a rising trend before investing. Things to look for:

The first sign of a new trend will be when the price crosses the 50 day moving average.

For a long-term trend to be established you want to see prices above the 200 day (40 week) moving average. When you see this you may then want to consider following this trend. This will provide confidence that the bottom has been established and a new trend is in force.

Today’s Wall Street Journal (WSJ) included an article about the owner’s of the Pittsburgh Steelers and their looming estate tax problem. The Steeler’s have been owned by the Rooney family since 1933. The value of the franchise is now estimated to be over $700 million. The five sons of the original owner are now all in or approaching their 70’s. Together they control 80% of the business.

The problem is the 45% federal estate tax that will put them each on the hook with the IRS for tens of millions of dollars at their death. Since the value of their estate is locked up in their business, that simply might be more than they can afford. For instance, let’s assume each brother’s share of the business is worth $100 million. At death each of them would have to have $45 million in cash just to pay the estate tax! In other words, the business has to be sold just to generate the cash to pay the death tax.

This is absurd! Why do we punish those who are successful? Why do we allow the government to enforce taxes that separate families from their businesses? As noted in the WSJ’s article it’s not just the future generations of families that suffer; when families are forced to sell businesses the community often loses out too.

You might be thinking: “Oh, why should I care? I’ll never have a family business worth $700 million to worry about.” Well, maybe not. But, the estate tax threatens more people than you think. In fact, it threatens families all around us. Right here in Northwest Ohio many families have worked hard for generations to acquire land and equipment in order to devleop successful farming enterprises. The estate tax is especially threatening for these families. Such operations may be worth several million dollars when the value of land, livestock, buildings, and equipment are considered. Yet when the owner dies, the next generation often does not have liquid cash to pay the tax bill. As a result, all or part of the family business may be sold to pay the IRS. This doesn’t just happen with farms, but with small businesses everywhere around you.

I agree with Gary Harpst. In his book, Six Disciplines for Excellence, he states that he believes that small business owners truly are heroes. So why do we punish these entrepreneurs who have worked hard to build a business of substantial value? The government taxes us all of our lives and then if we are fortunate enough to have built wealth to pass on to future generations they tax that too! It’s time for politicians to develop solutions that work! The estate tax is a nightmare to the American Dream.

By the way: Take a look at another article in today’s WSJ to see where all this tax money goes. Answer: government bailouts!

At the end of June my business partner, Tony, and I attended the Morningstar Investment Conference. The conference was a 3-day event in Chicago that attracts many great minds in the investment business. You can visit Morningstar’s online coverage of the conference here.

My favorite session was lunch on Thursday. (Maybe it had something to do with the food?) The speaker was Jason Zweig. Jason shared some insights from his recent book, Your Money & Your Brain. As you can guess by the title of the book his talk focused on what happens inside our brains when we think about money. Jason’s talk was both entertaining and enlightening. I haven’t read his book yet, but his talk left me wanting to learn more. I recently discovered that a firm I admire greatly (Davis Advisors) has made the book required reading for all of their investment analysts. If someone like Chris requires his staff to read a book then I’ve got to read it.

I also enjoyed listening to Bruce Berkowitz. Bruce runs the Fairholme Fund (FAIRX), and he does a nice job for investors. My favorite quote by Mr. Berkowitz: “These are the times when seeds of great performance are planted.” I couldn’t agree more.

For more details on the conference, don’t forget to visit Morningstar.com for links to articles, blog posts, and videos. You can also find additional web coverage at ModerGraham.com: